- Australian building approvals slumped in August, declining by 9.4% following a 4.6% fall in July.
- Approvals for both houses and dwellings excluding houses — largely units — fell, dropping by 1.9% and 17.2% respectively from a month earlier.
- The decline in approvals mirrors recent weakness in new home sales, and points to residential construction detracting from GDP in the years ahead.
Australian building approvals fell heavily in August, largely reflecting a steep drop in apartments.
According to the Australian Bureau of Statistics (ABS), approvals fell by 9.4% to 16,477 in seasonally adjusted terms, leaving the decline on a year earlier at 13.6%.
Markets were looking for an increase of 1% during the month.
July’s figure, originally reported as a fall of 5.2%, was revised slightly higher to a drop of only 4.6%.
Still, combined with the result from August, there’s now little doubt that residential construction activity in the period ahead will be greatly reduced compared to the levels seen in recent years.
Over the month, approvals to build private sector homes fell 1.9% to 9,572 while those to build dwellings excluding houses — predominantly units — slumped by 17.2% to 6,788.
From a year earlier, approvals in both categories fell by 4.4% and 23.7% respectively.
The total for non-house approvals was the lowest monthly since October 2016, and down 45% from the record high of 12,387 in November last year.
The result fits with the latest Performance of Construction Index (PCI) released by the Australian Industry Group’s (Ai Group) which revealed activity levels in the apartment sector deteriorated at the fastest pace in nearly six years in September.
“Apartment builders indicated that activity was being driven lower in response to project completions, reduced inquiries and falling investor demand,” the group said.
In trend terms, helping to reduce the volatility in the seasonally adjusted data caused by large one-off unit developments, the ABS said approvals fell by a smaller 1.9% to 17,456 over the month, and by 9.1% over the year.
Approvals for houses slipped 1.2% to 9,655 while those for other residential dwellings slumped 15.1% to 7,612.
Whether in trend or seasonally adjusted terms, it’s clear the outlook for residential construction is faltering.
More importantly, after being a tailwind for GDP growth in recent years, residential construction — based on the pipeline of new work — now looks set to drag on economic activity.
The only real question now is by how much?
“Despite strong population growth, historically low vacancy rates and record low interest rates, it appears that falling dwelling prices and a tightening in credit conditions will see residential construction decline over the next few years,” said Gareth Aird, Senior Economist at the Commonwealth Bank.
“From a growth perspective, residential construction will be a drag on the economy from here.”
Clearly, based on today’s data, recent declines in Australian home prices — led by Sydney and Melbourne — is now starting to have an impact on future housing supply.
The ABS said total dwellings approved in New South Wales fell 1.6% in trend terms, outpaced by a significantly larger decline of 5.1% in Melbourne.
Elsewhere, approvals in South Australia fell 3.6% while those in Queensland were flat. Western Australia — despite ongoing price declines this year — managed to buck the broader trend, lifting 2.7% in trend terms.
Mirroring the decline in total approvals, the value of new residential work also fell, dropping by 0.8% in trend terms, the seventh consecutive monthly decline in a row.
The value of non-residential approvals fell by a larger 2.3%, continuing the decline seen in each of the prior 12 months.
Combined, the total value of new building work slipped 1.3% in trend terms, adding to the weakness seen since late last year.
After a period of stabilisation earlier this year, Shane Oliver, Chief Economist at AMP Capital, said the August data suggests the downtrend in approvals looks to have resumed.
“This is consistent with a peaking in residential cranes and along with a declining trend in alterations and additions points to a weakening in housing construction activity ahead,” he said.
“A further softening is likely as new supply hits the property market putting downwards pressure on property prices which will likely reinforce a slowdown in apartment construction.”
As such, Oliver thinks the prospect of another rate cut from the RBA cannot be completely ruled out.
“The emerging downturn in the dwelling construction cycle is another reason why we expect the RBA to leave rates on hold at least out to 2020 and why there is still a significant risk that the next move in rates may still turn out to be down and not up,” he said.
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